In re Coudert Brothers LLP, Case No. 06-12226(RDD) (Bankr. S.D.N.Y. 11/21/2007), Case No. 06-12226(RDD).
| Decision Date | 21 November 2007 |
| Docket Number | Case No. 06-12226(RDD). |
| Parties | In re: COUDERT BROTHERS LLP, Chapter 11, Debtor. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
KLESTADT & WINTERS, LLP, by Tracy L. Klestadt, Esq., for the Debtor
MILES & STOCKBRIDGE, P.C., by John E. Prominski, Esq., for Almaty Metro-Municipal Corporation (Kazakhstan), Almaty Metro-Municipal Corporation (U.S.), and Intercontinental Commerce Corporation
The debtor and debtor in possession ("Coudert" or the "Debtor") is a law firm in liquidation. Having voted to begin winding down its practice on August 16, 2005, it sought relief under chapter 11 of the Bankruptcy Code on September 22, 2006. On August 6, 2007, Almaty Metro-Municipal Corporation (Kazakhstan), Almaty Metro-Municipal Corporation (U.S.), and Intercontinental Commerce Corporation (collectively, "Almaty"), former Coudert clients apparently under common ownership, filed a motion to compel the Debtor to abandon and turn over Almaty's original corporate documents (the "Corporate Documents") and corporate seals (the "Corporate Seals;" with the Corporate Documents, the "Client Property") pursuant to Fed. R. Bankr. P. 6007(b) and sections 105(a) and 554(b) of the Bankruptcy Code. 11 U.S.C. §§ 105(a), 554(b).
The Debtor objected to Almaty's motion primarily on the basis that it asserts a retaining lien on the Client Property to secure a large account receivable for unpaid legal fees and expenses. Almaty responded that the District of Columbia's Rules of Professional Conduct ("DC Bar Rules") preclude the enforcement of such a lien and, in any event, to the extent the Debtor has such a lien, require turnover of the Client Property to avoid the significant risk of Almaty's irreparable harm.
The Court held an evidentiary hearing on August 27, 2007. Rather than close the hearing, however, the Court requested additional submissions regarding an apparent ambiguity in the DC Bar Rule upon which the parties had focused.
Having now reviewed the parties' supplemental memoranda and considered other relevant authorities, the Court concludes that the Debtor must release to Almaty (a) the Corporate Seals and (b) all Corporate Documents that are not Coudert's work product. In addition, Coudert must release any Corporate Documents constituting attorney work product if Almaty establishes that Coudert's retention of such Corporate Documents subjects Almaty to significant risk of irreparable harm. The Court will finish the evidentiary hearing — limited, however, to issues of what constitutes "work product" and "Almaty's significant risk of irreparable harm" for purposes of the DC Bar Rules — if the parties cannot resolve those issues between themselves in light of this Memorandum.
From at least January 2004 through September 2005, Coudert represented Almaty, including in connection with the proposed financing and construction of a monorail in Almaty, Kazakhstan. Coudert's services were performed in Kazakhstan and perhaps in Washington, D.C., and Coudert held the Client Property primarily, if not entirely, in Kazakhstan, although some also may have been maintained in Washington, D.C. Almaty's president and CEO, Ekrm J. Miller, testified that the Corporate Seals and "corporate books" were consistently kept in Coudert's office in Kazakhstan and that he left them in the custody of Tom O'Brien, Coudert's resident partner there and Mr. Miller's primary contact, even after Mr. O'Brien told him that Coudert was going out of business. Aug. 27, 2007 Tr. 106, 112.1 Mr. Miller testified that he understood Mr. O'Brien eventually would move to another firm and that he would bring the Client Property with him, subject to Almaty's ability to get it back at any time. Id. at 106.2
It turned out, however, that because progress stopped on the monorail project for reasons unrelated to Coudert, Almaty did not need any of the Client Property until recently. Id. at 107. Now, however, the project is restarting, id., and Almaty convincingly contends that it must affix the Corporate Seals to various documents, including proposed financing agreements, for those documents to be binding. Id. It also contends that it requires its "corporate books" to conduct its revived business, id., which the Court also accepts, if by "corporate books" Almaty means its formal organizational documents and minute books. Almaty has not identified any other Client Property that it presently requires to conduct its business.
Soon after seeking chapter 11 relief, the Debtor began an adversary proceeding against Almaty to collect unpaid prepetition legal fees and expenses of not less than $1,281,706.38. Almaty's answer does not dispute that this sum is unpaid but denies that it is owed and asserts various defenses including that the three Almaty entities are not jointly liable for the fees but only for their respective portions, that "some" of the alleged services for which Coudert seeks compensation were outside the scope of the legal representation for which it had been retained, and that "some or all" of such services were unnecessary and excessive or barred by various alleged impediments such as conflicts of interest, unclean hands, waiver and estoppel, breach of Coudert's professional obligations, and novation. The issues raised by the adversary proceeding have not been decided, but, notwithstanding the artful "some or all" pleading in Almaty's answer, it appears that each of the Almaty entities owes at least some amount to the Debtor for unpaid legal fees and expenses.
On notice to Almaty, among other former clients, the Debtor also moved relatively early in its chapter 11 case (the "Client File Motion") for an Order Approving and Authorizing Implementation of Procedures for Disposition of Certain Retained Client Files, which the Court entered on January 22, 2007. The Client File Motion expressly "reserve[d] the [Debtor's] right to withhold [any] Retained Client File if the Debtor maintains a claim against the former client for counsel [fees]." Client File Motion ¶ 39.
There is an unsigned retention agreement between Coudert and Almaty with a Washington, D.C. choice of law provision, which Almaty relies upon for asserting that Washington, D.C. law governs this dispute (which the Debtor does not contest). Neither in this retention agreement nor apparently in any other document did Almaty grant Coudert a security interest; the Debtor relies solely upon a common law retaining lien to justify its refusal to return the Client Property.3 As noted above, however, Almaty contends that the DC Bar Rules have drastically narrowed the scope of any retaining lien that Coudert might be able to assert, and a retaining lien surviving the Rules' promulgation is, in any event, defeated by Almaty's need for the Corporate Seals and "corporate papers."
A. The Common Law Rule. Before the adoption of the DC Bar Rules, absent an agreement to the contrary, attorneys in the District of Columbia could assert an enforceable common law retaining lien on any client property in their possession for unpaid legal fees and expenses. Beardsley v. Cockerell, 240 F. Supp. 845, 848 (D. D.C. 1965); DC Bar Legal Ethics Comm. Op. 230 (September 15, 1992) ("DC Bar Opinion 230"). Such a "retaining lien attaches to property of the client in the possession of the attorney and entitles the attorney to retain possession of that property until the fee is paid." Wolf v. Sherman, 682 A.2d 194, 197 (D.C. 1996); see also In re Hines, 482 A.2d 378, 380 n.7 (D.C. 1984). It is a "retaining" lien because "the attorney can take no steps to realize upon the property so held to satisfy the unpaid fee; the only effect of the `lien' is to permit the attorney to bring pressure upon the client by withholding possession of the property in question." Wolf v. Sherman, 682 A.2d at 197, n. 8.
B. The DC Bar Rules. The DC Bar Rules, adopted in 1991, modified the common law retaining lien, however. In re The Greater Southeast Comm. Hosp. Foundation, Inc., 2001 Bankr. LEXIS 1780, *5 (Bankr. D. D.C., June 11, 2001). DC Bar Rule 1.8(i), applicable to the present dispute, provides A lawyer may acquire and enforce a lien granted by law to secure the lawyer's fees or expenses, but a lawyer shall not impose a lien upon any part of a client's files, except upon the lawyer's own work product, and then only to the extent that the work product has not been paid for. This work product exception shall not apply when the client has become unable to pay, or when withholding the lawyer's work product would present a significant risk to the client of irreparable harm.
One change to the common law rule is clear from a plain reading of DC Bar Rule 1.8(i): a retaining lien on attorney work product in a client file will no longer prevail against a client's turnover demand if withholding the work product "would present a significant risk to the client of irreparable harm." Id. Given that the only value of a retaining lien is the leverage accorded an attorney when the client needs something in the attorney's possession, DC Bar Rule 1.8(i) arguably therefore renders retaining liens on client files meaningless. The client will pay the bill only if it sorely needs the work product that the attorney was withholding, and, now, such need compels turnover. The Rule nevertheless adopts the work product/risk of irreparable harm formulation, rather than simply abolishes retaining liens, for at least one good reason — to prevent clients from overburdening their attorneys with having to turn over useless documents. See DC Bar Legal Ethics Comm. Op. 283 (July 15, 1998) ("DC Bar Opinion 283"); see also Johnson v. United States, 616 A.2d 1216, 1237 (D.C. 1992)...
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